Maryland and US Boat Tax Attorneys

Florida Boat Tax – Major July 1, 2010 Change

Because Florida is such an important destination for East Coast boaters, we have discussed its taxation scheme several times in the past. To recap, Florida has both a sales and a use tax for boats set at 6% of the purchase price or fair market value. The use tax can be applied under a number of different situations. First and foremost, when you arrive in Florida the Department of Revenue will look at your vessel at the actual time of purchase. As long as you meet the following three criteria you will NOT owe the 6% use tax at the time of your arrival:

1. You have owned your vessel for 6 months or longer.

2. The boat is not owned by a Florida resident or the boat does not belong to a corporation for the use of a corporate officer or director who is a Florida resident or who owns, controls, or manages a dwelling in Florida.

3. You have shown no intent to use your vessel in Florida at or before the time of purchase.

4. Your vessel has been used 6 months or longer within the taxing jurisdiction of another state, U.S. territory, or the District of Columbia. Time spent in foreign waters does not count as part of the 6-month period.

Even if the boat is not initially taxable in Florida, however, the vessel will again become taxable at a rate of 6% of fair market value if the boat remains in Florida for 90 consecutive days or 183 days within a calendar year. These basic rules continue to apply.

The Change

The big change in Florida tax is that they have imposed a cap on the total amount that can be due on a vessel. The capped number is $18,000. Since Florida taxes at a 6% rate, this means that the change can potentially impact any boat that has a value of greater than $300,000. The change, therefore, will not have too great an effect on the average family cruiser, but it will have a dramatic effect on boats that are $500,000 and up. The has already been passed by the legislature and signed into law by the Governor. This takes effect on July 1, 2010, and covers all sales that occur on or after that date.

The Duck and the Dodge

Prior to this enactment, boat owners that wanted to enjoy Florida waters, but did not want to pay Florida’s tax had several legal ways to avoid payment (many probably avoided illegally as well). First, so long as they were not Florida residents, they could bring the boat to another state for part of the year and bring it back to Florida for the cold months. This worked great for snowbirds, sportfishers and others who tended to migrate with the season. Larger boats — especially those $1,000,000+ already had a means of avoiding tax. Those boats could register offshore (the BVI’s, St. Vincent and the Marshall Islands were popular) then bring the boat back to Florida under an annual cruising permit from the U.S. Coast Guard. Under the cruising permit, the boats could remain in Florida, or anywhere else in the U.S. for one year. The boats were then required to leave U.S. waters and enter a foreign port, they could then turn around and apply for a new cruising permit. The significant drawbacks to offshore registration (and the reason more people did not do it) included cost and hassle. Setting up and maintaining an offshore company to own the boat was a significant ongoing expense (up to $25,000 for initial registration and approximately $5,000 in maintenance fees per year), and the boat was required to depart U.S. waters each year to renew the cruising permit, which increased fuel costs, crew costs, etc. In addition, there was the issue of perception that many people did not like — a foreign flag on a yacht owned by an American pretty much guaranteed a tax dodge — and the perception could be uncomfortable even if it was perfectly legal. Anyone that has spent time in Fort Lauderdale has seen the many boats there that were registered offshore — those boats were paying significant annual carrying costs in order to avoid the one-time Florida tax.

The Ripple Effect

For the immediate, this means that that any boat that has a value of $400,000 or more can realize a significant savings on its tax as compared with paying the uncapped Florida tax. This will not mean much to those that keep their boats in Rhode Island or Delaware, but for those trying to decide between keeping a boat in Maryland (uncapped 5%), New Jersey (uncapped 3.5% or 7% depending upon the county of purchase) or many personal property tax states such as Virginia, it will be an easy choice. The greatest effect, however, will be on the big boats that rely on either offshore registration or a full-time crew to keep the boat moving. With the tax capped at $18,000, it will likely take only two to three years (and maybe less) before they begin to realize savings by paying Florida and avoiding the costs of an offshore corporation, and the costs of fuel and crew to move the boat offshore periodically. One of the other great disadvantages to having a boat registered offshore is that it could not be chartered in US waters with a Captain or crew provided by the owners. (This a result of the fact that a non-US built and documented boat is not allowed to enter into the coastwise trades in the United States). Now, however, if a boat is federally documented and registered to Florida, and it can obtain a coastwise endorsement, it is eligible to be chartered with its regular crew in the United States. This is potentially a boon to the owners of larger yachts — they can charter their boats while they remain in the care of trusted crew — and they can thereby recoup their tax payment faster.

Winners and Losers

The probable winners in this scenario include owners of US built fine yachts and other yachts that can obtain a waiver from the Coast Guard allowing them to get a Coastwise Endorsement and thereby charter the boats in US waters. Crews of those boats will also do well. The State of Florida, as well as its marinas and marine-workers should also do well — there will certainly be boats that choose to come to and remain in Florida that would not do so otherwise. Florida boat brokers should also do well — although they also saw some advantages under the offshore scheme that was being used. This tax cap will also hopefully open up the availability of marine financing, especially in Florida, making purchase loans easier to obtain and causing a reduction in interest rates.

As a guess, the losers in this scenario will be some Captains and crews who will no longer be needed to move boats around, and certainly the cottage industry in the BVIs which provided corporations and related services will suffer. A sharp reduction in the number of vessel documentation service companies is expected, with this work returning to the purview of maritime attorneys. The State of Maryland and similar states will also lose to some degree — though most significant boats already avoided those jurisdictions if possible. An additional consequence of Florida’s new tax cap may be a reduction in the demand for larger yachts that are currently offshore flagged in the BVI’s or elsewhere. When a vessel is flagged offshore it permanently loses its eligibility to return to the U.S. registry and gain a coastwise endorsement (although it remains its ability to gain a recreational endorsement). These yachts are therefore permanently precluded from chartering in the United States with a domestic crew. The reduced income potential of these yachts will likely lead to a reduced demand, especially in light of the terrific deals than can currently be obtained on new and previously-owned US-built yachts.

Pitfalls and Unexpected Consequences

For boats that do take advantage of Florida’s new cap, there are still some open questions. For example, a $1,000,000 boat registered in Florida would only pay $18,000 in tax. If that boat came to another use tax state, such as New Jersey and became taxable there, the state could potentially collect on the difference between $18,000 and the amount due under the uncapped rate. This could be a significant penalty for the unwary. A related potential pitfall may exist in many marine insurance policies. Policies issued on the east coast of the United States for larger yachts generally contain navigational and seasonal limitations requiring that vessel be re-located above North Carolina during the annual hurricane season. Many people already complied with this provision simply because they did not want to leave their vessels in Florida for fear of the potential tax ramifications. With the passage of the tax cap many people will still be required to move their vessel out of Florida during hurricane season despite paying Florida sales tax in order to comply with the exclusion in their marine insurance policies. The danger is that many may move their boats to a jurisdiction with a higher tax rate than the Florida capped rate and these states will try to collect the difference. Many boaters tend to believe that once they pay sales tax they are free and clear for the remainder of the life of their boat, unfortunately this is not the case and many boaters each year feel the sting of use tax and personal property tax assessments.

There is also a great fear that boat dealers and marine service companies throughout the east coast will see a downturn in business as a result of Florida’s tax cap. With more people moving their boats to Florida, there could be a potential drain on the marine economy in uncapped states such as Maryland and New Jersey. States have always had a difficult time attracting boaters away from Florida with its sunshine and endless beaches, these difficulties will now be exacerbated by Florida’s more attractive tax regime. It will be interesting to see how states respond in the coming years as the true effect of Florida’s new tax regime is studied. Maryland, for example, now finds itself in the unenviable position of being directly south of a tax-free state (Delaware), directly north of a tax-capped state (Virginia), and now forced compete with tax-capped Florida. Through the enactment of its new tax cap, Florida may have forever changed the landscape of the recreational boating industry, whether this is a positive or negative change depends solely on your perspective.